Thank You

Error.

Rarely has the cliché rung as true as with the latest report that showed the nation's jobless rate fell 0.1 of a percentage point last month, to 7.6%—even though fewer people had jobs and more were unemployed. The improvement, if you can call it that, was the result of nearly half a million folks dropping out of the labor force and the smallest percentage of the working-age population in the workforce in a generation.

All of which came as a shock to bulls on Wall Street, who had lifted the Dow Jones Industrial Average and the Standard & Poor's 500 to records surpassing their previous peaks set in October 2007. That's even though the bond and commodity markets have been sending signals in recent days that were out of phase with the steady melt-up in the major market indexes.

The March employment report released Friday morning actually was the culmination of a parade of weaker-than-expected data for the month just ended, including softer (but still positive) readings for purchasing managers' indexes for both manufacturing and services, plus a rise in initial claims for unemployment insurance in the past three weeks.

But none of that prepared the markets for the shocking news that nonfarm payrolls increased by only 88,000 workers in March, less than half the consensus guess from economists of a 190,000 rise. (The payroll data come from a survey of business establishments, separate from the polling of households that provide the numbers that go into the politically important unemployment rate.)

There were some consolation prizes in the jobs-report bust, notably upward revisions in February's payrolls to a gain of 268,000 from 236,000, and January's rise, to 148,000 from 119,000. And these are seasonally adjusted numbers, which are heavily influenced by small variations in the weather or calendar quirks, especially early in the year. As Citigroup economist Steven C. Wieting points out, before seasonal adjustment, payrolls actually rose by 759,000 in March, which was short of the average 900,000 rise in the two previous years. That followed a 1.022 million jump in February, which was above the average increase of 880,000 in the prior two years. So, month-to-month swings in the payroll numbers should be taken with a hefty chunk of salt.

That said, the household report told a scarier story of fewer folks working and even fewer looking for work, even if it anomalously produced a lower headline jobless rate. Only 63.3% of the working-age population was either working or actively looking for a job last month, the lowest since May 1979, when the participation in the workplace by women was ramping up. Had labor-force participation rates remained around the 66% level that had prevailed before the 2007-2009 recession, the unemployment rate would be about four percentage points higher, in the mid-11% range, writes Joshua Shapiro, chief economist for MFR. And demographics aren't affecting the participation rate as commonly assumed.

"Making things worse from a social perspective," he adds, "the drop in the participation rate has been centered in younger workers, many of whom have given up hope of finding a decent job and are instead continuing in school and racking up enormous amounts of student debt, which has contributed to the recent surge in consumer credit outstanding. Difficulties of the young are exacerbated by the rising participation rates of older members of the labor force who have seen retirement savings/benefits and home values diminish, and who are now being forced to work longer than many had originally planned."

Fiscal policy may be a deterrent to hiring, however. The termination of the 2% payroll tax "holiday" may be beginning to bite. Retailers cut employment by 24,000 last month amid generally soggy same-store sales. Meanwhile, the March 1 spending cuts under the so-called sequester have yet to be felt. The 7,000 drop in government employment reflected mainly a 12,000 decline at the Postal Service, which is unrelated to the sequester.

Taking the sum of the jobs numbers, Philippa Dunne and Doug Henwood of the Liscio Report write that the labor market's weakness reflects weak hiring more than sackings. Meanwhile, weakness in hourly earnings—flat in the latest month—doesn't point to tighter labor-market conditions, which typically would be implied by a lower jobless rate. And if wages do tick up, the reserve army of labor, to use Marx's term, of folks not officially in the workforce can readily be called up. That is, if employers want to enlist them.

BEFORE THE BUREAU OF Labor Statistics stunned the bulls with punk jobs numbers, the bond market was on to what was afoot. Amid the universal near-certainty at the beginning of 2013 that bond yields had nowhere to go but up, the Treasury market has rallied in seeming incongruous fashion to bring yields to levels below where they ended last year.

The benchmark 10-year Treasury note ended the week at 1.71%, below 1.76% at year end and well under the 2.06% peak hit in early March. More surprisingly, the yield on the 30-year Treasury bond sliced through the 3% level, to 2.86% at week's end, down from more than 3.25% in early March. The notion of locking in an investment paying less than 3% for three decades seems ludicrous—except given the recent price performance captured by the
iShares Barclays 20+Year Treasury BondTLT -0.2837550248285647%iShares 20+ Year Treasury Bond ETFU.S.: NYSE Arca126.51
-0.36-0.2837550248285647%
/Date(1425418574051-0600)/
Volume (Delayed 15m)
:
7380266
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
2.3917457305502845% Rev. per Employee
N/AMore quote details and news »TLTinYour ValueYour ChangeShort position
exchange-traded fund (ticker: TLT). "For all the daily 'hype' about hitting new highs, the long bond (TLT) has outperformed stocks (SPY) since Feb. 1," writes Peter Tchir, head of TF Market Advisors, citing the symbol for the
SPDR Standard & Poor's 500SPY -0.3820934949761781%SPDR S&P 500 ETF TrustU.S.: NYSE Arca211.18
-0.81-0.3820934949761781%
/Date(1425418575439-0600)/
Volume (Delayed 15m)
:
81289402
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
2.1523221352540607% Rev. per Employee
N/AMore quote details and news »SPYinYour ValueYour ChangeShort position
ETF. In the latest week, the long Treasury ETF surged 4.3%, more than reversing its first-quarter decline of 2.8%.

And even as the stock market's major measures have been scaling the new highs trumpeted on TV and the pages of nonfinancial newspapers, equities' advance has been led by staid, lower-risk stocks—in other words, the most bond-like names out there, a point made previously in this column (although admittedly a far from original one). Moreover, they remained a safe haven last week while the SPDR S&P 500 fell 1% after rising 10% in price terms in the first quarter. The
Powershares QQQQQQ -0.484549277747303%PowerShares QQQ Trust Series 1U.S.: Nasdaq108.85
-0.53-0.484549277747303%
/Date(1425418562758-0600)/
Volume (Delayed 15m)
:
17152871
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
1.4227494252873563% Rev. per Employee
N/AMore quote details and news »QQQinYour ValueYour ChangeShort position
(QQQ), which tracks the Nasdaq 100, slumped 1.6% last week after its 6% first-quarter gain. Meanwhile, the
iShares Russell 2000IWM -0.48594800356361867%iShares Russell 2000 ETFU.S.: NYSE Arca122.87
-0.6-0.48594800356361867%
/Date(1425418575441-0600)/
Volume (Delayed 15m)
:
17302015
P/E Ratio
N/AMarket Cap
N/A
Dividend Yield
1.4506653714287576% Rev. per Employee
N/AMore quote details and news »IWMinYour ValueYour ChangeShort position
ETF (IWM)—the benchmark for small-capitalization stocks, which tend to be more domestically oriented than multinational big-caps—fell 2.9% last week after its 12% first-quarter score.

After the euphoric first-quarter rally, a note of caution has entered the market conversation—as opposed to the unspoken risk aversion expressed by the strength of consumer staples stocks such as
Procter & GamblePG -0.2809975412715139%Procter & Gamble Co.U.S.: NYSEUSD85.17
-0.24-0.2809975412715139%
/Date(1425418573440-0600)/
Volume (Delayed 15m)
:
4705924
P/E Ratio
24.91364674199403Market Cap
230650569823.645
Dividend Yield
3.0247914463635297% Rev. per Employee
692110More quote details and news »PGinYour ValueYour ChangeShort position
(PG). The shares ended the week less than a buck below their 52-week high as investors (forgive me for repeating) like Bounty even more than Treasury paper. After all, they're paying a fancy 19 times June fiscal-year earnings for it.

All of which makes the first-quarter earnings-reporting season, which kicks off this week, more crucial. Once again, corporations have managed expectations lower, with preannouncements of results tilted heavily to the negative side. While some expectations are for profits of S&P 500 companies to rise 15% this year, Michael Cosgrove, editor of the Econoclast monthly advisory, writes "earnings will be lucky to increase at half that pace."

Corporate earnings growth of 5%-6% may be more likely than a double-digit pace with nominal gross domestic product growing 4%. Moreover, a big chunk of S&P 500 earnings comes from abroad, and may lag owing to weakness in Europe and the dollar's strength, which hurts translation of foreign profits.

BEYOND ALL THESE FACTORS, the weak jobs report removes any near-term possibility that the Federal Reserve will scale back its purchases of Treasury and agency mortgage-backed securities, currently running at a $1 trillion annual pace. While the Fed has aimed to bring the unemployment rate down to 6.5% before reversing its hyper-expansive monetary policy, there is no chance it will be deluded into thinking that a lower jobless rate resulting from a half a million erstwhile workers going AWOL represents an actual improvement in the labor market.

The Bank of Japan said last week it would double its bond-buying program to a pace just short of the Fed's—to pump liquidity into the Japanese economy, which is one-third the size of the U.S. economy. That sent the yen plunging, with yields on 10-year Japanese government bonds falling to just 0.5%, while continuing to lift Japanese stock prices. Whether that pulls Japan's economy, which is weighed down by structural and demographic factors (more deaths than births), out of its torpor is another question.

But for now, America's and Japan's central banks have their printing presses on overdrive. The European Central Bank has been holding back, actually contracting its balance sheet recently, which increases the odds of a crisis worse than that surrounding Cyprus.

Rising risks may make investors with double-digit first-quarter gains think discretion is the better part of valor. They may be unfashionably early for the "sell in May and go away" hiatus, especially if earnings season disappoints.